Pure fin savings means eligible for 80C deductions

Shaji Vikraman and Hema Ramakrishnan, TNNNov 30, 2005, 01.27AM IST

MUMBAI/PUNE: It's good news for home owners and parents, as the EET regime plans not to tax home loans and tuition fees at any stage.

Only pure financial savings instruments like PPF, LIC policies, government of India bonds and pension policies will qualify for tax deduction under 80 C, going by the recommendations, say government sources. Investors, who claim tax deduction on these instruments, will have to pay tax at the time of withdrawal.

The proposed EET regime, where withdrawals will be taxed but not contributions and earnings on it, will not be applicable when it comes to tax-breaks, if continued, on the principal amount repaid on home loans or on tuition fees paid for children.

The panel has proposed a tax on withdrawals only for investors who claim a tax deduction up to Rs 1 lakh on designated savings instruments under 80 C.

However, for the first time, investors will have the flexibility of switching their investments from one savings instrument to another within the basket. No tax will be levied, while rotating between savings instruments. The changes proposed by the committee may mean that an investor won't be able to claim a tax deduction up to Rs 1 lakh on the principal amount he repays on his home loan or tuition fees paid for his children under Section 80 C, as is currently the case. There is, however, no cause for panic.

The government may continue giving income tax relief on the principal amount repaid by an individual on home loans and tuition fees — in line with its policy to encourage investments in housing and education.

The rationale for excluding home loans and tuition fees from the ambit of Section 80 C is to make a distinction between financial and non-financial savings instruments while transiting to an EET regime.

Apart from the tax deduction under 80C on the principal amount for housing loans, individuals also enjoy tax-breaks on the interest component of the housing loan. Interest up to Rs 1.5 lakh on a housing loan is tax deductible.

The expert panel has steered clear of any recommendation on this particular tax benefit, as it was not part of its terms of reference.